Assessment of Appropriateness & Suitability Policy

Transcription

1 Assessment of Appropriateness & Suitability Policy Abstract: This%document%delineates%Company s%policies%and%procedures%for%assessment%of% Appropriateness%&%Suitability.%This%document%summarizes%our%recommended%procedures.%% Proprietary Restriction: This controlled document is property of GS Sharestocks Ltd. any disclosure, reproduction or transmission to unauthorized parties without the prior written permission of GetStocks is prohibited. Page 1 of 12

2 a.! Introduction GS Sharestocks Ltd (hereinafter the Company ; We ) is regulated by the Cyprus Securities and Exchange Commission ( the Commission, CySEC ) and is authorized by it as a Cypriot Investment Firm ( CIF ), license number According to the Company s said CIF license, it is entitled to provide Portfolio Management and Investment Advice services. Providing these services legally obliges the Company to perform an assessment of suitability for the Company s clients ( Clients ) managed accounts, and investment advice, as applicable. Due to the Company s unique social trading method, the Client s portfolios are not managed only by the Company s Portfolio Management Department and under its sole discretion, but rather the Client s portfolio is an aggregate of all the positions and trades occurring in the Client s account as a result of the Client piggybacking other Clients ( Aggregated Piggybacked Portfolio ). The Company also performs risk and suitability assessment on the single piggyback transaction level, where the Client piggybacks another Client ( Single Piggybacked Portfolio ). The combination of all Single Piggybacked Portfolios risk assessment constitutes the Aggregated Piggybacked Portfolio risk assessment. This does not deny or outdates the Portfolio Management Department s rights and obligations regarding the Clients Piggybacked Portfolios, including the obligation to assess suitability as hereby described. The Company is required to inform the Clients and potential Clients, in a clear and simple manner, that the reason for assessing suitability is to enable the Company to act in the Clients best interest. At no stage should the Company create any ambiguity or confusion about their own responsibilities in the process. b.! Definitions Appropriateness assessment means the process of collecting information about a Client and the subsequent assessment of the appropriateness of a given financial instrument for that Client. Leader means each Client that another client or clients are subscribed to (hence they receive notifications about the Leader s trading activity), andor which other client or clients piggyback (hence automated trading activity is performed in their portfolio, in accordance with the Leader s trading activity). Aggregated Piggybacked Portfolio means an aggregate of all the positions and trades occurring in the Client s account as a result of the Client piggybacking other Clients. Single Piggybacked Portfolio means all positions that appear in one Client s portfolio - a Leader - which are copied to the second Client s portfolio. Suitability assessment means the whole process of collecting information about a Client, and the subsequent assessment of the suitability of a given financial instrument or a composition of several financial instruments to that Client. The Company (We) means GS Sharestocks Ltd., a Cyprus Investment Firm under license number c.! Common provisions for the Assessment of Appropriateness & Suitability Page 2 of 12

3 The Company shall ensure that the information regarding a Client's or potential Client's knowledge and experience in the investment field includes the following, to the extent appropriate to the nature of the Client, the nature and extent of the service to be provided and the anticipated type of product or transaction, including their complexity and the risks involved: a.! b.! c.! The types of service, transaction and financial instrument with which the Client is familiar with; The nature, volume, and frequency of the Client's transactions in financial instruments and the period over which they have been carried out; The level of relevant education, profession or former profession of the Client or potential Client. The Company shall not encourage a Client or a potential Client not to provide information required for the purpose of assessing the appropriateness and suitability. The Company shall be entitled to rely on the information provided by its Clients or potential Clients unless it is aware or ought to be aware that the information is manifestly out of date, inaccurate or incomplete. d.! Assessment of Appropriateness The Company, when assessing whether an investment service is appropriate for a Client, determines whether that Client has the necessary experience and knowledge in order to understand the risks involved in relation to the product or investment service offered or demanded. For those purposes, the Company shall be entitled to assume that a professional Client has the necessary experience and knowledge in order to understand the risks involved in relation to those particular investment services or transactions, or types of transaction or product, for which the Client is classified as a professional Client. When the Company provides its clients investment services that only consist of the reception and transmission of orders with or without ancillary services, it may provide those investment services to its Clients without the need to make assessment of appropriateness, if all the following conditions are met: a.! b.! c.! d.! The above services relate to shares admitted to trading on a regulated market or in an equivalent third country market, money market instruments, bonds or other forms of securitized debt (excluding those bonds or securitized debt that embed a derivative), UCITS and other non-complex financial instruments, a third country market shall be considered as equivalent to a regulated market if it complies with requirements of the European Union legal framework for the provision of financial services; the service is provided at the initiative of the Client or potential Client; the Client or potential Client has been clearly informed that in the provision of this service the Company is not required to assess the appropriateness of the financial instrument or investment service provided or offered and that therefore he does not benefit from the corresponding protection of the relevant conduct of business rules (this warning may be provided in a standardized format); and The Company complies with its obligations for establishing and maintaining a conflict of interest policy. Page 3 of 12

4 Since the Company offers its services in line with all the above conditions, there s no further implementation of the appropriateness assessment. If the Company will change the way it provides the services in a way that is not in line with the above mentioned conditions, the implementation of appropriateness assessment will be changed accordingly. e.! Assessment of Suitability The Company shall obtain from Clients or potential Clients such information as is necessary for the Company in order to understand the essential facts about the Client and to have a reasonable basis, giving due consideration to the nature and extent of the service provided, for believing that the specific transaction to be entered into, in the course of providing investment advice or portfolio management services, satisfies the following criteria: a.! b.! c.! It meets the investment objectives of the Client in question; It is such that the Client is able to financially bear any related investment risks consistent with his investment objectives; It is such that the Client has the necessary experience and knowledge in order to understand the risks involved in the transaction. Where the Company shall provide an investment service to a professional Client it shall be entitled to assume that, in relation to the products, transactions and services for which it is so classified, the Client has the necessary level of experience and knowledge for the purposes of point (c) above. The information regarding the financial situation of the Client or potential Client shall include, where relevant, information on the source and extent of his regular income, his assets, including liquid assets, investments and real property, and information regarding his regular financial commitments. The information regarding the investment objectives of the Client or potential Client shall include, where relevant, information on the length of time for which the Client wishes to hold the investment, his preferences regarding risk taking, his risk profile, and the purposes of the investment. f.! Implementation The Company s obligation to perform assessment of suitability solely applies to a Client s Aggregated Piggybacked Portfolio, which is an aggregate of all Client s positions executed due to the Client piggybacking one or more other Clients, and to advice provided in the form of direct notifications of trades to Clients who have subscribed for such notifications. The Company s assessment of suitability will not apply to trades and positions the Client has initiated and performed by himself ( Proprietary Trading ) and the Company does not provide investment services of portfolio management andor investment advice in Proprietary Trading. In the case of Proprietary Trading, only an assessment of appropriateness may apply. All of the necessary information for the appropriateness assessment is collected through the completion of the questionnaire which is included in the Account Opening Procedure for the purposes of assessing the suitability. The Company defined 3 Client risk level categories according to the Client s risk appetite score: Page 4 of 12

5 Client Risk Level Client Risk Appetite Scoreaccording to application form Aggregated Single Piggybacked Portfolio risk score- according to calculation Low Medium High The way the company performs the suitability assessment is by matching between a Client s risk appetite score and a Client s Aggregated andor Single Piggybacked Portfolio risk score and monitoring the Client s received notifications about other Clients trades, when he subscribes to such other Clients. The implementation of the Assessment of Suitability is performed as described: 1.! Calculating Client Risk Appetite Score according to client s application form 1.1.! When a new potential Client wishes to perform any act with the platform, he first registers to the platform by filling out the Account Opening Form. The Account Opening Form includes, inter alia, a set of pre-defined questions. The answers to these questions constitute the basis for suitability and appropriateness assessment of the Client. The weights of each of the answers influence the overall calculation of a Client s risk appetite score ( Client s Risk Appetite, Client s Results ), is predetermined. 1.2.! On the Account Opening Form, the Clients are presented with the reason for assessing suitability, which is to enable the Company to act on their best interest. In particular, the following statement is disclosed to the clients: Suitability assessment should be understood as meaning the whole process of collecting information about a Client, and the subsequent assessment of the suitability of a given financial instrument for that client. It is highly important to gather complete and accurate information so that the Company can un-piggyback you from piggyback positions that are unsuitable for you. 1.3.! The Client Risk Appetite is calculated automatically according to the answers the Client provides during the registration process. There are 6 questions that the Client must answer during registration. Each question has several options, and each option will get a score between 1 and 5. The sum of the score is a number between 8 and 40, so the minimum score is 8 and the maximum score is ! The table below displays the relevant questions from the questionnaire, the options and the score for each option: Page 5 of 12

6 Questions Option Score Option Score Option Score Option Score Option Score General and Financial Information Current Occupation Student & Unemployed - 1 Retired- 2 All the rest- 5 Annual Income After Tax 0-50k 50k-75k 75k-100k 100k-200k more than 200k Liquid Savings & Investments (Excluding Property) 0-50k 50k-75k 75k-100k 100k-200k more than 200k How Much do you intend to invest with GetStocks? 0-50k k-up 5 Experience and Knowledge What is your experience in stocks and shares trading? Never traded 1 - Trade on occasion 3 - Frequently trade 5 What is your education or professional Qualification Other 1 University Degree (Business, Finance, Economy) MBA Degree; Professional Finance Services Qualification Higher Professional Finance Services Qualification What is the desired investment horizon Very short term (0-0.5 Years) 1 Short term (0.5 2 Years) 2 Short to Medium term (2-3 years) 3 Medium term (3-4 years) 4 Long term (>5 years) 5 What is the desired yearly return on your investments Low (2% - 4%) 1 Low Medium (4%-6%) 2 Medium (6% - 10%) 3 Medium-High (10% - 12%) 4 High (>12%) 5 Page 6 of 12

7 1.5.! Categorizing risk score:!! Low Risk Appetite - is a Client with score between 8 and 13!! Medium Risk Appetite - is a Client with score between 14 and 21!! High Risk Appetite - is a Client with score between 22 and ! The Company takes reasonable steps to check the reliability of information collected about Clients. The Company remains responsible for ensuring it has adequate information to conduct a suitability assessment. In particular, the Company should consider whether there are any obvious inaccuracies in the information provided by its Clients. In particular, when contradictions between various answers provided by Clients are identified, the Company is required to contact the respective Clients in order to resolve any material potential inconsistencies or inaccuracies. In the event where Clients are not able to understand the questions that have been set through the Account Opening Procedure, the Company will need to ensure that that the respective method used to collect information will be amended in way to get the information required for a suitability assessment, if deemed necessary. 1.7.! Consent in relation to the submission of true and accurate and the updating of information: in order to be able to proceed to the next stage of the Account Opening Application Form the Clients need to hereby certify that the information provided for the purposes of the assessment of suitability is true and accurate so as to enable the Company to unpiggybacked them from all of piggybacked positions that are unsuitable for them. In addition, the Clients are required to consent that in case where any changes took place with regard to the information submitted for the suitability assessment, they will inform the Company accordingly. In particular, the Clients are required to tick a box in order to express their consent in relation to both aforementioned requirements. 2.! Measuring risk level score of an Aggregated Piggybacked Portfolio- according to calculation 2.1.! Risk level is determined in scale unit of 0 to 10, where 0 is the minimum risk and 10 the maximum risk. In order to calculate the Aggregated Piggybacked Portfolio risk level of a Client we need to define the risk of the traded financial instruments according to the sensitivity (volatility) of the Instruments, leverage rate, and currencies. 2.2.! Defining financial instruments risk levels: In our trading platform we have two (2) financial instruments:! Securities! Currencies (due to changes between two Clients base currency account, andor the changes between the Client s currency and the stock exchanges currency). The risk involved with each one of these instruments depends on the volatility of the instruments (Volatility type):! Leverage Ratio! Security Price volatility Page 7 of 12

8 2.3.! Risk-Weighted: We give the Aggregated Piggybacked Portfolio a risk score based on the asset volatility in given point in time:!! 0-3: Low Risk!! 4-7: Medium Risk!! 8-10: High Risk! We calculate risk of the Aggregated Piggybacked Portfolio to define the risk score of the trader s managed portfolio. 2.4.! Aggregated Piggybacked Portfolio Risk Level Calculation: -! Effect of Security Price volatility: Using common practices, we use the financial instruments volatility to calculate portfolio risk. Risk is calculated as the cumulative volatility of a portfolio, expressed as: Portfolio volatility= ) #*+ " # $ %&%' ( # $ ) ) + % ( 2%&%01(2(3), 2(6))) 8*+ 7*89+! We normalize risk to a scale of 1-10, defining: $! Risk Level = ' (:;<=>;?#;)! 0-3: Low Risk! 4-7: Medium Risk! 8-10: High Risk! Risk Level >10 " Risk Level = 10 -! Effect of leverage on risk measurement: Since we currently only allow leverage when our clients perform short trades, this risk factor will only apply when performing such short trades.!! Since the maintenance margin is 50%, a trader is susceptible to twice the volatility of the financial instrument, so the standard deviation and covariance factors are doubled. For example the risk of a portfolio with 50% in long position on stock A and 50% in short position on stock B will be: ' $ (:;<=>;?#;) = 0.5 $ $ &' ( C $ $ &D&' ( E +2&F&01(G, H)!! -! How different currencies affect risk When we calculate risk level we always use financial instruments prices in the Trader s Account Currency (which is the currency in which the client deposit its cash with us), so the currency changes are reflected in the risk level. For example, if a trader which his Account Currency is GBP, holds AAPL stock (traded in USD) in the portfolio, we will calculate AAPL share price using GBPUSD rate for each day and use these values to calculate variance and covariance. Page 8 of 12

9 3.! Measuring risk level score of a Single Piggybacked Portfolio 3.1! Defining and calculating Single Piggybacked Portfolio risk levels:!! At the end of each day we will calculate the variance of the Single Piggybacked Portfolio gain (based on a 6 months period) ( Gain Variance ), as follows: ) #*+ " # $ %&%' ( # $ ) ) + % ( 2%&%01(2(3), 2(6))) 8*+ 7*89+!! Also, at the end of each day we will calculate the Single Piggybacked Portfolio risk score based on the method described on section 2.4 above ( Portfolio Variance ).!! The Risk score for a Single Piggybacked Portfolio is set as the Maximal value between Portfolio Variance and Gain Variance. 3.2! Risk-Weighted: Similar to Aggregated Piggybacked Portfolio risk score, we give the Single Piggybacked Portfolio a risk score based on the gain volatility in given point in time:!! 0-3: Low Risk!! 4-7: Medium Risk!! 8-10: High Risk We calculate risk of the Single Piggybacked Portfolio to define his risk score of a single trader s (potentially a Leader in some cases) portfolio. 4.! Performing Portfolio Managers duties during trading: While the Platform has no mandatory duty by law to make sure that the Client trades securities in accordance with its suitability test results when performing Proprietary Trading, if the Client performs piggybacking, it could be deemed as portfolio management and in that case the Platform is obliged to act in accordance with the Client's Results, when providing these services to the specific Client. In order to make sure that the services provided are in accordance with a Client's Results, the platform implements the following mechanism1: 4.1! Monitoring of new piggybacking transactions: When a client wishes to start piggybacking a potential leader, the Company performs a suitability assessment prior to approving his piggyback request. The assessment is dual-layered, and the two following conditions need to be fulfilled: a.! The Single Piggybacked Portfolio risk score of the potential Leader is lowerequal to the client s risk assessment score; and %%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%% 1 %In%addition%to%the%suitability%assessment,%the%Company%also%implemented%a%Client s%independent%stop% loss% mechanism:% % When% a% Client% asks% to% piggyback% another% Client,% when% he% clicks% the% "piggyback"% button,%a%window%occurs%with%the%following%appears%in%it:%"i%want%to%piggyback%[ ]%(name%of%client)% with%[ ]%%of%my%current%portfolio%.%i%want%to%stop%piggybacking%[ ]%(name%of%client)%and%close%all% positions%immediately%when%i%lose%more%than%[ ]%%of%this%investment".%when%the%client%reaches% the% top% loss% he% agreed% to% bear,% the% platform% stop% him% from% piggybacking% the% other% Client% and% immediately%closes%his%positions,%which%were%created%because%of%piggybacking%the%other%client.%if%the% Client%wishes%to%continue%piggybacking%the%other%Client,%he%will%need%to%click%the%piggyback%button%and% fill%the%abovementioned%questions%again.%as%this%stop%loss%is%not%mandatory%and%is%under%the%client s% sole%discretion,%it%is%not%a%part%of%the%company s%suitability%assessment.%% Page 9 of 12

10 b.! A simulation of the new aggregated Piggybacked Portfolio, consisting of all the client s current piggyback positions and the potential Leader s Single Piggybacked Portfolio risk score is lowerequal to the client s risk assessment score. In case neither of the abovementioned conditions are met, the platform does not allow the client to piggyback the potential Leader, and heshe are promptly noticed. 4.2! Monitoring of ongoing piggybacking positions: Once a day, on 23:30 UCT, the platform calculates the risk score of a client s Piggybacked portfolio. The assessment is dual-layered, and the two following conditions need to fulfill: a.! All the client s Leaders Single Piggybacked Portfolios risk scores, based only on the Gain Variance calculation, are lowerequal to the client s risk assessment score; and b.! The Aggregated Piggybacked Portfolio risk score is lowerequal to the client s risk assessment score. In case neither of the two abovementioned conditions are met, back-office and portfolio management departments, at the full discretion of the head of portfolio management department, will un-piggyback the client from all or part of his Leaders in a way that the two abovementioned conditions will be fulfilled, and as they do so, the client will be promptly noticed, as follows: Dear <firstname>, The piggyback position you held on <TRADER> is no longer suited to your risk appetite, and in accordance with GetStocks statutory obligations, we have been forced to liquidate your position. All funds have been returned to your account. Please contact Customer Service with any questions you may have. Kind Regards, The GetStocks Team 5.! Performing Investment Advisors duties during trading: live monitoring of notifications regarding Client s trades While the Platform has no mandatory duty by law to make sure that the Client trades securities in accordance with its suitability test results when performing Proprietary Trading, if the Client subscribes to another Client, it could be deemed as investment advice, and in that case the Platform is obliged to act in accordance with the Client's Results, when providing these services to the specific Client. In case the Client subscribed to another Client's trades feed, we will not send the subscriber a push notification regarding a trade which is outside his risk appetite. Such notification only contains the following information: N! Client s name N! financial instrument s name N! Buysell (including short) N! Price of transaction Therefore, the only component out of the data provided in a notification, as described above, that may constitute investment advice is the financial instrument traded. Due to the fact that currently the only financial instrument traded in the system is shares listed in regulated markets, which are considered a non-complex, low risk financial instrument Page 10 of 12

11 according to MIFID, all the Clients can receive all notifications, which are ranked automatically as low risk score advice. 6.! Updating 6.1! Where the Company has an on-going relationship with the Client, it should establish appropriate procedures in order to maintain adequate and updated information about the Client. 6.2! Frequency might vary depending on, 6.2.1!Clients risk profiles: A higher risk profile is likely to require more frequent updating than a lower risk profile !Certain events: which might also trigger an updating process (e.g. for Clients reaching the age of retirement). 7.! Record Keeping Procedure 7.1! The Company shall ensure that: 7.1.1!It maintains adequate recording and retention arrangements to ensure orderly and transparent record-keeping regarding the suitability assessment, including any investment advice provided and all investments (and disinvestments) made; 7.1.2!ensure that record-keeping arrangements are designed to enable the detection of failures regarding the suitability assessment (such as miss selling); 7.1.3!ensure that records kept are accessible for the relevant persons in the Company, and for competent authorities; 7.1.4!Have adequate processes to mitigate any shortcomings or limitations of the record-keeping arrangements. 7.2! The Company records all relevant information about the suitability assessment, such as information about the client (including how that information is used and interpreted to define the Client s risk profile). Those records include: 7.2.1!Any changes made by the Company regarding the suitability assessment, in particular any change to the Client s investment risk profile; 7.2.2!The types of financial instruments that fit that profile and the rationale for such an assessment, as well as any changes and the reasons for them. 7.3! Records shall be kept in the Client s electronic file and must be maintained for at least five year after the termination of the business relationship between the Company and the respective Client. 8.! General 8.1! The portfolio manager can set alternative methods for reviewing Clients Type inconsistencies, under its discretion, as long as they do not shortfall the abovementioned method, and all in accordance with the board approval of such said change. 8.2! The portfolio manager will document the results of his review in the CRM record system and in any other form he deems necessary. 8.3! The Platform may publish all or part of the risk appetite criteria on the terms and conditions document. 8.4! The portfolio manager will review these criteria and will change them from time to time, as he finds necessary, under its discretion and all in accordance with the board approval of such said change. Page 11 of 12

12 8.5! Any change of these criteria will be announced in the Platform- on each Client's mailbox, and on the terms and conditions document. Page 12 of 12